Private Equity is vulnerable to compliance risk

Private Equity is at Risk.

If you ever hear someone say, “We’re a private company so we don’t need to worry about risk and compliance,” you may gently let them know they are mistaken. Private equity firms have the same risk as public companies because they need to follow international laws just like everyone else. Private companies will face the same kind of damage to their reputation from a Department of Justice investigation.

 

Exposed to Public Scrutiny.

Since the late 1970’s the number of private equity firms has grown from a handful of firms to over 10,000 private equity companies. This increase in size and range of investments has exposed the firms to public scrutiny. Private equity firms used to conduct business transactions in blissful obscurity but now their prevalence makes them vulnerable to international laws such as the UK Bribery Act and the Foreign Corrupt Practice Act FCPA. In addition the private equity firms have entered the public pension funds market which require ethical and governance review.

 

Compliance risk management.

Private equity firms must manage their compliance risk as they conduct business transactions. They need to consider their exposure to compliance risk with the potential damage to the reputation when they evaluate growth in new markets and global economies. The more private equity firms expand the more they begin to look like public companies and therefore must prepare for public scrutiny.

 

Third Party Liability.

Just like public companies, private companies may be liable for the criminal acts of their subsidiaries. The Wall Street Journal reported a Federal Bureau Investigation raid of one of the largest privately-held companies in the U.S. Truck-stop chain called Pilot Flying J was named in an affidavit filed in federal court. Allegedly, Pilot Flying J employees conducted a scheme to increase sales commissions and boost company profit by deceptively withholding diesel-fuel price rebates and discounts from Pilot Flying J customers without those customers’ knowledge or approval. Pilot generally agrees to pay its trucking customers rebates based on volume purchases and other variables. The affidavit asserts that Pilot employees didn’t pay the companies the full amounts they were owed. Though the affidavit doesn’t detail the total dollar amounts of the alleged scheme, the document includes transcripts of sales staff in alleged recorded conversations discussing millions of dollars not being paid to trucking-company customers. The owners of Pilot Flying J, include Chief Executive Jimmy Haslam III, the majority owner of the Cleveland Browns football team; his brother, Bill Haslam, the governor of Tennessee; and CVC Capital Partners Ltd., a London-based private-equity firm.